“Piracy” Is the Result of Market Failures

Publishers of digital media, be it music, movies, or software, have long argued that it’s a legal and moral problem.  The reasons, they claim, that unauthorized copies (I refuse to call them illegal or pirate) exist is because either organized criminals are stealing their “intellectual property”, or people are too stupid or immoral to respect their so-called property.

I’ve long argued that so-called intellectual property isn’t property at all.  It’s a privileged monopoly bestowed by the government and usually it has negative consequences for society: it raises costs and it slows and discourages innovation.

Economically, the studies that the copyright industry uses to estimate their supposed “losses” to piracy are totally bogus.  They assume that every unauthorized copy could have been sold for the existing market price.  But that violates everything we know about demand curves.  Typically people go for unauthorized copies because the existing legal market is either too expensive for the value provided, or too expensive for available budget, or simply not available.

Now Michael Geist, a Canadian professor goes even further and explains how my view is supported by a new international study by the Social Science Research Council.  They attribute the existence of so-called piracy to “market failures” – the overpricing and inadequate marketing/distribution strategies of the copyright holders. (emphasis is mine)

Trademark and copyright holders frequently characterize piracy as a legal failure, arguing that tougher laws and increased enforcement are needed to stem infringing activity. But my weekly technology law column (Toronto Star version, homepage version) notes that a new global study on piracy, backed by Canada’s International Development Research Centre, comes to a different conclusion. Following several years of independent investigation in six emerging economies, the report concludes that piracy is chiefly a product of a market failure, not a legal one.

The Social Science Research Council launched the study in 2006, identifying partner institutions in South Africa, Russia, Brazil, Mexico, Bolivia, and India to better understand the market for media piracy such as music, movies, and software. The result is the most comprehensive analysis of piracy to date.

The 440-page report challenges many of the oft-repeated claims about piracy and how address it. For example, it finds that contrary to repeated claims that there are strong links between piracy and organized crime, no such link exists. …

Similarly, it finds no evidence that anti-piracy “education programs” – some of which have been launched in Canada – have any discernable impact on consumer behaviour. …

The report also rejects the conventional wisdom that tougher penalties provide a strong deterrent to piracy activities. ..

While setting the record straight on piracy myths is valuable, the report’s most important contribution comes from chronicling how piracy is primarily a function of market failure. In many developing countries, there are few meaningful legal distribution channels for media products. The report notes “the pirate market cannot be said to compete with legal sales or generate losses for industry. At the low end of the socioeconomic ladder where such distribution gaps are common, piracy often simply is the market.”

Even in those jurisdictions where there are legal distribution channels, pricing renders many products unaffordable for the vast majority of the population. Foreign rights holder are often more concerned with preserving high prices in developed countries, rather than actively trying to engage the local population with reasonably priced access. These strategies may maximize profits globally, but they also serve to facilitate pirate markets in many developed countries.

The Death of Recorded Music Sales

First, let’s look at:

The REAL Death Of The Music Industry


Michael DeGusta | Feb. 18, 2011, 12:13 PM

    In January, Bain & Company produced the following chart as part of their report on “Publishing in the Digital Age” (PDF):

    Music Industry

    Image: Bain Analysis

    Then on Tuesday, someone posted it on Flickr. Subsequently, Peter Kafka of Wall Street Journal’s MediaMemo noticed it and passed it along to Jay Yarow, who made it Business Insider’s Chart of the Day on Wednesday, citing Kafka and the Flickr post. On Thursday, the excellent John Gruber at Daring Fireball linked to it and between those two postings the chart garnered a fair bit of attention, including from the likes of apparent digital music expert Bob Lefsetz (“First in Music Analysis”). No one seems to have tracked it back to the original source nor noticed what happened to catch my eye straight away:

    This chart sucks.

    What’s Wrong With It

    Oh, Bain – I hope no one has hired you for your expert “analysis” in this field:

    • The chart uses raw revenue numbers, not adjusted for inflation or population.
    • The chart is labeled “Global Music Turnover” but the data is actually US only. 1
    • The chart says “Bain Analysis” but it’s very unclear that they did any analysis, since anyone paying the RIAA $25 can login and immediately see virtually the same chart, albeit formatted slightly differently.
    • They fail to clarify how & if they distribute the RIAA’s 16 sometimes vague categories amongst the 4 they use.

    The Right Chart

    Music Industry

    Image: Recording Industry Association of America

    All discussion herein is for US recorded music as covered by the RIAA. The above chart is adjusted for inflation & population – for full details, see below.

    Obviously the recorded music biz has a significant decline in total $ of sales since it’s peak around 1999-2000. But, then the industry had quite a run there from 1986-2000.

    So what do you think accounts for the decline in sales, especially the decline since 2005?

    1. It’s all those kids ripping off the poor studios by file-sharing copies of music
    2. Um, a whole lot of discretionary spending has tanked since 2006. We had a Great Recession, recorded music is actually kind of a luxury and not essential and the only people with rising incomes are the Wall St types and they don’t listen to that much music.
    3. Well, most of the new music is crap that doesn’t sound that good thanks to all the new fangled processing – certainly not as good as the old days when the world’s greatest rock-n-roll band recorded on vinyl.
    4. It’s not really a good business practice or sound marketing strategy to be suing your customers all the time for alleged copyright infringement.
    5. Wasn’t 2001 when Michael Jackson’s last album came out?  Bieber just can’t compare.

    SO what’s the correct answer?  Well it helps to dive a little deeper (see the full article here:  http://www.businessinsider.com/these-charts-explain-the-real-death-of-the-music-industry-2011-2#ixzz1FOmV58XD)   But essentially it seems that the biggest culprit is the switch to digital formats, but not because of any piracy issues.  Instead digital formats (iTunes, MP3 sales) has had the effect of switching sales away from albums and towards singles-only.  Turns out the industry in the past was built on a model of sell a bundle (the album) of mixed stuff.  The one or two songs the people wanted with a lot of crap they didn’t.  In digital world, there’s no need to bundle. Consumers just buy the one song they want and don’t end up buying the other songs on the album.  Result: huge volume drop for the record labels.

    Of course, personally, I think it’s still a lot #3 above.